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The National Law Forum - Page 505 of 753 - Legal Updates. Legislative Analysis. Litigation News.

An In-Depth Analysis of the NLRB’s Decision to Permit Employees to Use Employer Email Systems for Union Organizing and Other Non-Work Purposes

Sheppard Mullin Law Firm

The rights of employees under Section 7 of the National Labor Relations Act have been given quite the digital treatment over the last few years.  In its newest decision issued on December 11, 2014, the National Labor Relations Board ruled that “employee use of email for statutorily protected communications on nonworking time must presumptively be permitted by employers who have chosen to give employees access to their email systems.”  The full decision can be found here.

In Purple Communications, Inc. and Communications Workers of America, AFL–CIO. Cases 21–CA–0951 51, 21–RC–091531, and 21–RC–091584, the Board overturned its previous decision in Register Guard, 351 NLRB 1110 (2007), which held that employees do not have a right to use their employers’ email systems for Section 7 purposes.  But, as seen in recent years, the Board has embraced the digital age and has concluded that employee Section 7 rights include everything from social media to, in this case, company email.

Like most companies, Purple Communications, Inc., has an “Internet, Intranet, Voicemail and Electronic Communication Policy” in its employee handbook.  Among other things, this policy prohibits employees from using the “computer, internet, voicemail and email systems, and other Company equipment” to engage in “activities on behalf of organizations or persons with no professional or business affiliation with [the] Company” or “sending uninvited email of a personal nature.”  The Communications Workers of America filed an unfair labor charge regarding this policy, and the Administrative Law Judge found the policy lawful under Register Guard, dismissing the allegations.  This new decision by the NLRB then followed.

In overturning Register Guard, the Board stated that email has “effectively become a natural gathering place pervasively used for employee-to-employee conversations” and the fact that this “gathering place” is virtual does not undermine the role that email plays in Section 7 protected workplace discussions.  In fact, the Board concluded that “email’s effectiveness as a mechanism for quickly sharing information and views increases its importance to employee communication,” especially in the seven years since Register Guardwas issued.  Interestingly, the Board relied on empirical evidence regarding the rise in “teleworking” and email usage for all work functions, at the physical workplace and remotely, to demonstrate that email has become a significant platform for employee communication.  Accordingly, it was held that email’s use for Section 7 activity must be protected under the NLRA.  The Board will no longer “perpetuate” an “outmoded assessment of workplace realities.”

The Board attempted to preemptively address employers’ concerns about the ruling, by stating that this decision is a “limited one,” in that it addresses only email and not any other types of electronic communication systems.  Moreover, businesses are not prevented from monitoring their computers and email systems for legitimate management purposes.  Finally, the Board stated that an employer may justify a ban on non-work use of its email system if it can point to “special circumstances” that necessitate the ban, including system overload, the nature of the business, and excessive costs.  Regardless, the Board’s dissenting members apparently are not convinced, arguing that this decision will lead to significant problems down the road.

Interestingly, the Board fails to directly address the decision’s effect on other types of policies that could be affected, such as non-solicitation and non‑distribution policies.  The Board distanced itself from the issue, stating that “we do not find it appropriate to treat email communication as either solicitation or distribution per se.”  The dissent took issue with this stance and predicts that this decision will make it very difficult to determine what communications violate lawful restrictions against solicitation in the future.

Although the Board did not outright declare Purple Communication’s electronic communications policy unlawful, employers should be wary of overly broad or restrictive electronic communications policies.  As with the onslaught of social media decisions and subsequent policy revisions, employers should take a hard look at their electronic communications policies in light of this decision and consider whether their policies put them at risk in this evolving digital age.

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Michigan Bill Would Bar Student-Athlete Unionization

Jackson Lewis Law firm

With a National Labor Relations Board decision on whether football players at Northwestern may proceed with their unionization efforts looming, Michigan is considering a bill that would prevent student-athletes from similarly attempting to unionize.

The bill, sponsored by Rep. Al Pscholka, would prevent student-athletes at Michigan’s public universities from exercising collective bargaining rights based on their participation in a university sports team. It states, “a student participating in intercollegiate athletics on behalf of a public university in [Michigan]…is not a public employee entitled to representation or collective bargaining rights….”

Michigan has seven public universities competing at the Division I level. The bill would bar student-athletes at these universities from engaging in unionization efforts similar to the ones undertaken by the football players at Northwestern.

While none of the seven universities has faced a union organizing campaign from any of its student-athletes, prompting one opponent of the bill, Rep. Andy Shor, to describe the bill as a solution to a nonexistent problem.

“I don’t understand the tremendous rush on this,” Shor said. “We’re taking an action that addresses something that’s happening in Evanston, Illinois.”

However, if the Board finds in favor of the football players at Northwestern, universities across the country likely will face similar unionization efforts from other student-athletes. Michigan’s may be an attempt to get out in front of such efforts.

According to Ramogi Huma, the president of the organization spearheading the unionization campaign at Northwestern, the College Athletes Players Association, Michigan’s bill is “backhanded confirmation that student-athletes are state employees by including them in a list of workers who can’t bargain effectively.” However, the bill does not categorize student-athletes as employees and, indeed, it states that “individuals whose position does not have sufficient indicia of an employer-employee relationship” are also prevented under the bill from engaging in collective bargaining.

Huma also warned that if the bill passes, it would have a negative impact on the ability of Michigan’s public universities to recruit student-athletes because prospective student-athletes interested in being part of a union could elect instead to go to either private universities in Michigan or universities in states with no restrictions on their unionization efforts.

Thus far, none of the seven Division I public universities in Michigan have commented publicly on the bill. However, the bill likely is being closely followed by them as well as public universities in other states and major athletic conferences, such as the Big Ten, home to Northwestern, Michigan, Michigan State, and Ohio State.

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SEC Sanctions Operator of Unregistered Virtual Currency Exchanges

Katten Muchin Law Firm

On December 8, the Securities and Exchange Commission sanctioned a computer programmer for operating two online exchanges that traded securities using virtual currencies without registering them as broker-dealers or stock exchanges. The programmer, Ethan Burnside, operated the two exchanges through his company, BTC Trading Corp., from August 2012 to October 2013. Account holders were able to purchase securities in virtual currency businesses using bitcoins on BTC Virtual Stock Exchange and using litecoins on LTC-Global Virtual Stock Exchange. The exchanges were not registered as broker-dealers but solicited the public to open accounts and trade securities. The exchanges also were not registered as stock exchanges but enlisted issuers to offer securities to the public for purchase and sale. Burnside also offered shares in LTC-Global Virtual Stock Exchange itself, as well as interests in a separate Litecoin mining venture, LTC-Mining, in exchange for virtual currencies. The SEC charged Burnside with willful violations of Sections 5(a) and 5(c) of the Securities Act of 1933 and Burnside and BTC Trading Corp. with willful violations of Sections 5 and 15(a) of the Securities Exchange Act of 1934. Burnside cooperated with the SEC’s investigation and settled, paying more than $68,000 in profits plus interest and a penalty. The SEC also barred Burnside from the securities industry.

The action may indicate that the SEC is taking a closer look at decentralized platforms for trading virtual currency using cryptocurrency technology, but the SEC has neither confirmed nor denied such speculation. In recent months, the SEC has reportedly sent voluntary information requests to companies and online “crypto-equity exchanges” offering equity and related interests denominated in virtual currency and websites offering digital tokens for programming platforms. A discussion of the SEC’s voluntary information sweep is available here.

Click here to read the SEC Press Release and here to read the SEC order.

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Data Analytics as a Risk Management Strategy

Risk-Management-Monitor-Com

In our increasingly competitive business environment, companies everywhere are looking for the next new thing to give them a competitive edge. But perhaps the next new thing is applying new techniques and capabilities to existing concepts such as risk management. The exponential growth of data as well as recent technologies and techniques for managing and analyzing data create more opportunities.

Computer Network Wires

Enterprise risk management can encompass so much more than merely making sure your business has purchased the right types and amounts of insurance. With the tools now available, businesses can quantify and model the risks they face to enable smarter mitigation strategies and better strategic decisions.

The discipline of risk management in general and the increasingly popular field of enterprise risk management have been around for years. But several recent trends and developments have increased the ability to execute on the concept of enterprise risk management.

First, the amount of data being produced everywhere has exploded and continues to accelerate. The typical executive today is swamped by data coming from all directions. Luckily, just as the raw amount of data has grown, the cost of the hardware to store data has decreased at an exponential rate. For example, in the last 10 years, retail hard-drive costs have dropped from about $1.20 per gigabyte (GB) in 2004 to about 4 cents per GB today. What’s more, the cost of hardware to store all that enterprise data is quickly becoming negligible.

But such huge amounts of data present a problem: Somebody has to manage and analyze it. All data is not equally important or relevant to the problems business executives need to solve or the risks they’re trying to manage. The explosion of data has created a greater amount of helpful and relevant data, but it can get lost in an even greater amount of useless, irrelevant, and distracting data. So an effective data management and analytics program is crucial to take advantage of the opportunities resident in the new flood of data.

One job of analytics is to sort the important from the unimportant and analyze and synthesize the data in new ways that create actionable information. Fortunately, the tools and techniques to manage large volumes of data have been progressing over the past several years. In particular, there has been a lot of buzz about big data. The field of big data has developed from a specific platform to manage large volumes of data into an entire ecosystem of related technologies. These tools are critical to the process of picking out the grains of useful intelligence from the vast quantities of distracting chaff that are characteristic of many big data sources.

Of course, all the recent technical developments and analytic techniques that make it possible to extract actionable information from a flood of data are all professionally exciting—if you’re an analyst. However, analytics for analytics’ sake does not help an organization. Often, analytics groups can remain isolated from the business itself. When such groups ultimately present what they have discovered, they may simply talk about the part most interesting to them—the analytics process—rather than focusing on the resulting information.

It is important to remember that actionable information is the ultimate goal of the entire exercise. The information must reach the decision makers in an understandable form when it is needed—the right information at the right place and at the right time. When designing information systems or even just presenting information to business executives, it is important for technical professionals to keep technical details to a minimum and focus on the actionable information. A feedback mechanism is critical. Users of the information must have a method to tell the creators of the information whether it was sufficient, correct, timely and understandable.

It’s been said that the three most important factors in real estate are location, location, and location. Similarly, the three most important factors in effective analytics are data, data, and data. Good data can sometimes make up for mediocre analytics, but even the best analytics will never produce anything useful from poor data.

Where should a business begin to leverage the new data and risk analytics? It has to start with the data itself. So start collecting and storing the data that’s available to you. Every business generates vast amounts every day. Collecting, managing, and analyzing internal data is necessary; but by looking outside the organization at social media, government data sources and third-party data vendors, a company can really begin to illuminate the environment in which it operates.

Managing data for analytics is a specialized field in its own right, and a topic for another day. But the business that can effectively leverage data and analytics to manage the risks it faces will be rewarded by seeing the future more clearly, making better decisions and ultimately being more successful than those companies that cannot.

Article authored by Phil Hatfield, modeling data services executive for ISO Insurance Programs and Analytic Services (IPAS), a Verisk Analytics (Nasdaq:VRSK) business.

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Online Presence Management: You Down with OP…M? Yeah, You Should Be!

Morgan Lewis logo

The stakes are higher than ever when it comes to your company’s online presence management (OPM), and you should be proactive in ensuring that your company is best positioned for success.

We are talking about total OPM. Yes, it is a real thing. The soaring growth of online media revenues (over 17%, recently), thesophistication of bad actors responsible for “mega-hacks,” and the ever-expanding social media market are but a few of the headlines that top the news on a daily basis.

Public interest is extremely high. As such, the risks and liabilities to your company are self-evident.

As a responsible lawyer (or, at least, someone interested enough in the law to read this blog), you should take a proactive approach to ensuring your organization is aligned with measures to both capitalize on the enormous opportunities presented by, as well as mitigate the risks associated with, managing your company’s total online presence.

So, where do you begin? What are the first steps? We recommend scheduling an internal discussion with your relevant stakeholders to take inventory of where you are with respect to your company’s OPM. You don’t need to involve outside counsel or be an expert in every nuance of the OPM space. Instead, the goal is to get a discussion between your business team and legal team about the structure and needs of your company. That is, the goal is to get the dialogue started internally so you have the information that you need to provide or to seek artful advice.

Here are the top three agenda items for your initial meeting:

1. Online Contracting Discussion—What agreements do you use, or should you use, on your website? Terms of service? Terms of use? Privacy policies? Codes of conduct? Foreign Corrupt Practices Act policies? Open-source policies? Once the inventory is completed, have a candid discussion with your business/marketing/OPM teams about (1) how each agreement is executed and used within the organization, (2) how updates are communicated, and (3) any pain points experienced by the business team. Special attention should be given to agreements that control services or products that produce revenue or that deal with the handling of important data or information. Understanding the total picture of your company’s online contracting structure allows you to identify risks and install protections to mitigate them.

2. Security Protocol Discussion—What are the processes in place to monitor and respond to potential security threats? What would your company do if it suspected a breach? How long would it react? What reporting systems are in place to alert responsible OPM team members of suspicious activities? Lawyers, like CEOs, can no longer assume that their company’s IT personnel handles these issues. By understanding the lay of the land, in-house lawyers and well-integrated outside counsel can better respond to emergency situations.

3. Data Leverage Discussion—What data is collected by your company’s internal tools? What data is collected by third-party tools and services? How is the data collected from the website (both personally identifiable and commercial) used by the company? Are there any synergies that can be gained by various business teams by gaining access to either of the above? Understanding what data is collected, especially commercial data such as user tendencies and product information, can assist lawyers in understanding the rights to negotiate when dealing with outside vendors and in drafting privacy policies.

As you can probably tell, the “discussions” approach will likely lead to many tangent discussions and identification of issues that you didn’t even realize existed in your organization. This is intentional.

In today’s online environment, you need to be proactive and agile to ensure that your company’s OPM is handled in a responsible, predictable, and measured manner. Having the discussions above will at least give you a starting point to demonstrate a more active approach and likely result in you being able to provide better and more business-focused counsel.

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Just in Time for the Holidays: Another HIPAA Settlement

Mcdermott Will Emery Law Firm

On December 2, 2014, the Office for Civil Rights (OCR) and Anchorage Community Mental Health Services, Inc., (ACMHS) entered into a Resolution Agreement and Corrective Action Plan (CAP) to settle alleged violations of the HIPAA Security Rule, which governs the safeguarding of electronic protected health information (ePHI).  OCR initiated an investigation into ACMHS’s compliance with HIPAA after receiving a March 2, 2012 notification from the provider regarding a breach of unsecured ePHI affecting 2,743 individuals.  The breach resulted from malware that compromised ACMHS’s information technology resources.

OCR’s investigation found that ACMHS (1) had never performed an accurate and thorough risk assessment of the potential risks and vulnerabilities to the confidentiality, integrity and availability of ePHI held by ACMHS; (2) had never implemented Security Rule policies and procedures; and (3) since 2008, had failed to implement technical security measures to guard against unauthorized access to ePHI transmitted electronically, by failing to ensure that appropriate firewalls were in place and regularly updated with available patches.

ACMHS agreed to pay $150,000 and to comply with the requirements set forth in the CAP to settle the allegations.  The CAP has a two-year term and obligates ACMHS to take the following actions:

  • Revise, adopt and distribute to its workforce updated Security Rule policies and procedures that have been approved by OCR

  • Develop and provide updated security awareness training (based on training materials approved by OCR) to applicable workforce members, and update and repeat the training annually

  • Conduct annual risk assessments of the potential risks and vulnerabilities to the confidentiality, integrity and availability of ePHI held by ACMHS, and document the security measures implemented to reduce the risks and vulnerabilities to a reasonable and appropriate level

  • Investigate and report to OCR any violations of its Security Rule policies and procedures by workforce members

  • Submit annual reports to OCR describing ACMHS’s compliance with the CAP

In announcing the settlement, OCR Director Jocelyn Samuels said, “[s]uccessful HIPAA compliance requires a common sense approach to assessing and addressing the risks to ePHI on a regular basis.  This includes reviewing systems for unpatched vulnerabilities and unsupported software that can leave patient information susceptible to malware and other risks.”  A copy of the Resolution Agreement and CAP can be found here.

The settlement is another reminder that covered entities and business associates should ensure that they have taken steps necessary and appropriate to safeguard the ePHI in their possession.  Conducting regular ePHI risk assessments, addressing any identified security vulnerabilities, implementing and updating comprehensive HIPAA policies and procedures, and appropriately training workforce members who have access to ePHI are all steps that covered entities and business associates must take to comply with HIPAA and protect ePHI.

Not Just Your (Company) Email System Anymore! re: NLRB Purple Communications Ruling

Godfrey Kahn Law Firm

On December 10, 2014, the National Labor Relations Board (Board) ruled in Purple Communications, Inc., 361 N.L.R.B. No. 126, thatemployees have a right, protected by the National Labor Relations Act (Act), to use an employer’s email system during non-working time for communications protected by the Act(e.g., to discuss union issues or other protected concerted activities protected by Section 7 of the Act). The Board has thus overruled prior precedent, as set out in Register Guard, 351 N.L.R.B. 1110 (2007), that the Act did not give employees the right to use their employer’s email systems for Section 7 purposes.

A copy of the December 10, 2014 Board decision can be found here. The following passage sums up the scope of the Board’s ruling:

First, [this ruling] applies only to employees who have already been granted access to the employer’s email system in the course of their work and does not require employers to provide such access. Second, an employer may justify a total ban on nonwork use of email, including Section 7 use on nonworking time, by demonstrating that special circumstances make the ban necessary to maintain production or dEmail Selection on Computeriscipline. Absent justification for a total ban, the employer may apply uniform and consistently enforced controls over its email system to the extent such controls are necessary to maintain production and discipline. Finally, we do not address email access by nonemployees, nor do we address any other type of electronic communications systems, as neither issue is raised in this case.

The Board’s decision may be appealed by the employer, but even if it is not appealed, the email issue will likely continue to be litigated before the Board. For now, employers should review their electronic communications policies to ensure compliance with the Board’s new standards or to, at a minimum, understand their risk.

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Federal Circuit’s Sandoz Decision Increases Importance of Post-Grant Proceedings to Biosimilar Developers

Sterne Kessler Goldstein Fox

On Friday, December 5, the U.S. Court of Appeals for the Federal Circuit rendered its decision in Sandoz v. Amgen, No. 2014-1693, a case with major implications for the emerging U.S. biosimilars industry. The decision addresses when and how a party seeking to launch a biosimilar product in the U.S. can initiate litigation to challenge the brand company’s potential blocking patents. This is the first instance in which the Federal Circuit has had the opportunity to address the scope and applicability of the Biologics Price Competition and Innovation Act (BPCIA), which established a formal pathway for biosimilar approval in the US.

Background

At issue in Sandoz is a litigation Sandoz, Inc. initiated against Amgen, Inc. and Hoffman-La Roche Inc. on June 24, 2013. Sandoz’s complaint seeks a declaratory judgment (DJ) that two patents owned by Roche and exclusively licensed to Amgen are invalid, unenforceable, and would not be infringed by the commercial marketing of Sandoz’s biosimilar version of Amgen’s blockbuster biologic product Enbrel® (etanercept). The patents at issue extend Amgen’s protection around etanercept an additional 15 years past the original patents. Sandoz filed its complaint against Amgen prior to filing any application with the FDA for approval to market its biosimilar etanercept product, which is currently in Phase III clinical trials. Sandoz will not file with the FDA until the Phase III trial is complete, and of course will not be able to market its version of etanercept in the US without FDA approval. At the time of suit, Amgen had not alleged Sandoz was currently doing anything that exposes it to liability for infringing Amgen’s patents rights around Enbrel®.

The District Court Decision

Amgen moved to dismiss Sandoz’s complaint, asserting that the court lacked jurisdiction to hear the case because no immediate and real controversy between the parties exists. In a brief order, the court granted Amgen’s motion to dismiss on two separate grounds. First, the court ruled that its discretion to enter a DJ in the case is subject to the provisions of the BPCIA, which sets specific limitations on the timing and conduct of any litigation arising from the filing of an application for approval to market a biosimilar. The court concluded that “neither a reference product sponsor, such as Amgen, nor [a biosimilar applicant] such as Sandoz, may file a lawsuit unless and until they have engaged in a series of statutorily–mandated exchanges of information” related to patents potentially in dispute. In this case, Sandoz had not complied with the exchanges as it had not even started the process by filing its application with the FDA.

Second, the court found that Sandoz had not established jurisdiction under traditional grounds because it had not established a real and immediate injury or threat of future injury caused by Amgen. The court noted that Amgen had never advised Sandoz that it intended to sue Sandoz, and that the mere allegation by Sandoz that it intended to file an application for FDA approval in the future was not sufficient to create a case on controversy. Sandoz appealed the district court order dismissing the action.

The Federal Circuit Decision

On appeal, Sandoz argued that the litigation provisions of the BPCIA only govern the statutory patent infringement litigation authorized by the Act after a biosimilar application is filed with the FDA, and do not apply to DJ actions in general. Sandoz further argued that nothing in the BPCIA can be construed to bar or limit in any way the ability to bring DJ actions to resolve patent disputes prior to filing a biosimilar application. Finally, Sandoz argued that the district court erred in concluding that Sandoz had not adequately demonstrated a sufficient actual case or controversy sufficient to allow the DJ action to proceed.

The Federal Circuit panel affirmed the district court’s dismissal of Sandoz’s complaint, concluding that Sandoz had not alleged an injury of sufficient immediacy and reality to create subject matter jurisdiction. The Federal Circuit noted that “a case of actual controversy” is a prerequisite to exercising declaratory judgment jurisdiction. The test for determining whether a case or controversy exists is whether “ there is a substantial controversy . . . of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” The Federal Circuit, however, declined to address the lower court’s interpretation of the BPCIA as barring a lawsuit by either the reference product sponsor or the biosimilar applicant unless and until the parties have engaged in the statutorily-mandated patent information exchanges.

In concluding that Sandoz’s complaint does not present a case or controversy, the Federal Circuit panel noted that there was no prior decision in which the Federal Circuit had found a case or controversy to exist when the only activity that would create exposure to potential infringement liability was a future activity requiring FDA approval that had not yet been sought. The court found the immediacy requirement lacking where the conclusion of Sandoz’s Phase III trial, which was a prerequisite for filing for FDA approval, was still several years away when Sandoz filed suit. The court refused to assume that the Phase III trial would be successful, and noted that the trial could in fact uncover issues with Sandoz’s product that could push the application filing date back even further. Alternatively, the clinical trial could fail resulting in Sandoz never seeking FDA approval, or Sandoz could modify its proposed product and file for approval on the modified product. The court also noted that Sandoz’s complaint lacked specificity as to how Amgen’s patents read or don’t read on Sandoz’s product; and instead relies on prior general assertions by Amgen that the patents at issue cover Enbrel, that Amgen will assert the patents against products that compete with Enbrel, and that Sandoz intends to market a competing product at some point in the future. Ultimately, the court concluded that the events allegedly exposing Sandoz to infringement liability may not occur as anticipated or may not occur at all. The court found that Sandoz also had not shown that it would suffer any “immediate and substantial adverse impact” from not being able to seek or secure a patent adjudication before filing its application for FDA approval.

Unanswered Questions

The Federal Circuit specifically stated that its decision was limited to the particular facts before it, and does not address whether Sandoz would be able to seek declaratory judgment jurisdiction once it files its FDA application, or whether the BPCIA forecloses declaratory judgment actions outside of the statutorily-mandated patent information exchange once the application is accepted by the FDA. The decision also did not clarify the additional issue disputed by the parties concerning what constitutes sufficient “notice of commercial marketing,” which the BPCIA states must be provided by the biosimilar applicant prior to launch.

Increased Important of Post-Grant Proceedings before the USPTO

Although the Sandoz court made a point to limit the scope of its decision to the facts before it, the decision casts substantial doubt on the ability of any biosimilar developer to bring a district court action challenging the reference product sponsor’s patents prior to filing a biosimilar application with the FDA and triggering the patent information exchange provisions of the BPCIA. At the same time, the decision elevates the importance to biosimilar developers of post-grant challenges before the U.S. Patent and Trademark Office, such as inter partes review (IPR) and post-grant review (PGR), as means for obtaining some degree of early patent certainty before initiating the FDA approval process. IPRs in particular have proven to be a potent weapon for generic drug manufacturers in the context of ANDA litigation. The lower standard of proof required to show invalidity, the expedited pace of the proceedings, and the decreased cost in comparison to district court litigation coupled with the extremely high rate in which patent claims are being invalidated provide generic manufacturers with tremendous leverage to obtain favorable settlements with brand companies. We expect that the Sandoz decision should only increase the speed with which post-grant proceedings are adopted in the biosimilar arena.

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Cyber and Technology Risk Insurance for the Construction Sector

Much Shelist law firm logo

The recent, well-publicized retail store data breach controversies have spawned a number of lawsuits and insurance claims. Not surprisingly, insurers have responded with attempts to fight claims for coverage for such losses. Insurance underwriters are carefully monitoring decisions being handed down by courts in these lawsuits. All of this activity has led to a new emphasis on cyber and technology risk and assessments, as well as on insurance-program strategies.

These developments have ramifications for the construction industry that include, and go well beyond, the data-breach context. Contractors, design professionals and owners may find that in addition to losses caused by data breaches, other types of losses occasioned by technology-related incidents may not be covered by their existing insurance programs.

Specifically, insureds may find themselves with substantial coverage gaps because:

  • data and technology exclusions have been added to general liability policies.

  • such losses typically involve economic losses (as opposed to property damages or personal-injury losses) that insurers argue are not covered by general liability policies.

  • data and technology losses may be the result of manufacturing glitches rather than professional negligence covered by professional liability policies.

Coverage for claims involving glitches, manufacturing errors and data breaches in technology-driven applications — such as Building Information Modeling (BIM), estimating and scheduling programs, and 3D printing — may be uncertain. A number of endorsements are currently available for data breach coverage, but insurers don’t necessarily have the construction industry in mind as they provide these initial products.

In addition, there is no such thing as a “standard” cyber liability policy, endorsement or exclusion. Insurers have their own forms with their own wording, and as seemingly minor differences in language may have a significant impact in coverage, such matters should be run past counsel.

Construction insurance brokers are telling us that insurers are in the process of determining how to respond to cyber and technology risk claims, what products to offer going forward, and how to underwrite and price these products. Keith W. Jurss, a senior vice president in Willis’s National Construction Practice warns:

“As the construction industry continues to identify the unique “cyber” risks that it faces we are identifying gaps in the current suite of “cyber” insurance coverages that are available.  In addition, new exclusionary language related to cyber risk under CGL and other policies adds to the gap.  The insurance industry is slowly beginning to respond with endorsements that give back coverage or new policies designed to address the specific risks of the construction industry.

“As we identify cyber insurance underwriters willing to evaluate the risks specific to the construction industry, we are seeing the development of unique solutions in the market. There is, however, more work required and as construction clients continue to demand solutions the industry will be forced to respond.”

Consequently, this is a time to stay in close touch with qualified construction insurance brokers who understand the sector and have their hands on the pulse of the latest available cyber and technology risk products. As these products become available, clients may also want to consider what cyber and technology risk coverage to require on projects and whether to include these requirements in downstream contracts.

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Apple Gets Another Bite At $368 Million Verdict

IMS_expert_blktype-transparent

You don’t get two bites at the apple, it is sometimes said, but Apple Inc. is getting a second bite at defending itself against a massive damages award after the Federal Circuit Court of Appeals vacated a $368 million jury verdict in a patent infringement case.

The court vacated the award because it found that the plaintiff’s damages expert improperly relied on a model known as the Nash Bargaining Solution to calculate reasonable royalty damages.

Federal district courts have split on whether to allow expert testimony using the Nash Bargaining Solution, but the Federal Circuit held that the expert failed to establish the tie between the Nash theorem and the facts of this case.

The underlying issue in the case was whether two of Apple’s products — FaceTime, which allows secure video calling between Apple devices, and VPN On Demand, which creates a virtual private network from an iOS device — infringed four patents owned by VirnetX, a Nevada software and licensing company.

A jury in federal court in Tyler, Texas, concluded that all four patents were valid and that Apple had infringed them. It awarded VirnetX damages of $368 million.

Proving Reasonable Royalties

On appeal, the Federal Circuit upheld the jury’s verdict of infringement with regard to the VPN On Demand product but reversed and remanded aspects of the infringement verdict with regard to the FaceTime product.

The court then turned its attention to Apple’s challenges of the testimony of VirnetX’s damages expert. In a patent case, when infringement is found, a court is to award damages “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.”

To establish a reasonable royalty rate in this case, VinetX’s expert offered three alternative methods of calculation. Apple challenged the admissibility of all three methods under Daubert, but over Apple’s objection, the trial court admitted the testimony.

On appeal, however, the Federal Circuit found problems with all three theories.

Smallest Salable Unit

The expert’s first theory was to apply a one percent royalty rate to the base. He derived the one percent rate from the royalty VirnetX typically sought in licensing its patents. For the base, he used what he called the “smallest salable unit” — the lowest sale price of each model of the iOS devices that contained the challenged features. With this theory, he calculated the total damages to be $708 million.

Apple argued that the expert erred by using the entire market value of its products as the royalty base without demonstrating that the patented features drove the demand for those products. The Federal Circuit agreed.

“The law requires patentees to apportion the royalty down to a reasonable estimate of the value of its claimed technology, or else establish that its patented technology drove demand for the entire product,” the court explained. “VirnetX did neither.”

The court went on to say that the expert “did not even try to link demand for the accused device to the patented feature, and failed to apportion value between the patented features and the vast number of nonpatented features contained in the accused products.”

The Nash Bargaining Solution

For both the expert’s second and third theories — each of which he used only with regard to FaceTime — he relied on the Nash Bargaining Solution, a so-called game theory developed in 1950 by John Nash, a mathematician and co-winner of the 1994 Nobel Prize in economics.

In his first use of the Nash theorem, the expert began by calculating the profits associated with the use of FaceTime. He did this based on the revenue generated by Apple’s addition of a front-facing camera on its mobile devices. He then determined that, under the Nash theory, the parties would have split this revenue 50/50. However, after accounting for Apple’s stronger bargaining position, he concluded that Apple would have taken 55 percent of the profits and VirnetX, 45 percent. That amounted to $588 million in damages.

For his second use of the Nash theorem, the expert assumed that FaceTime “drove sales” for Apple’s iOS products. Eighteen percent of all iOS sales would not have occurred without the addition of the FaceTime feature, he concluded. Based on that, he calculated the amount of Apple’s profits that he believed were attributable to FaceTime and apportioned 45 percent of those profits to VirnetX. That amounted to $606 million in damages for FaceTime.

Apple challenged both these theories, arguing that the expert’s use of the 50/50 split as a starting point was akin to the 25 percent rule of thumb for royalties that the Federal Circuit had rejected in earlier cases. Here again, the Federal Circuit agreed with Apple’s argument.

The problem, the court explained, is that the Nash theorem arrives at a result that follows from a certain set of premises. Here, the expert never tied his use of the theorem to the facts of the case.

“Anyone seeking to invoke the theorem as applicable to a particular situation must establish that fit, because the 50/50 profit-split result is proven by the theorem only on those premises,” the court said. In this case, the expert never did that.

Based on these conclusions, the court vacated the damages award and sent the case back to the district court for further proceedings.

Has an expert ever used the Nash Bargaining Solution, or other game theory, in one of your cases? If so, was the result positive?

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